[Peace&Chips] Foundry Slows in Q1... AI Business Prospects Remain Promising This Year

Samsung Foundry Faces Cloudy Q1 Earnings Outlook
Taiwan's TSMC Also Expected to Decline from Previous Quarter

Foundry Market Recovery Hopes Continue This Year
Samsung Announces 2nm Mass Production of AI Accelerator Chips

Inside view of Samsung Electronics Pyeongtaek Campus line / Photo by Samsung Electronics

This week, as Samsung Electronics announced its finalized results for the fourth quarter of last year, industry attention focused on its semiconductor performance. This is because Samsung Electronics succeeded in turning its DRAM business profitable within a year by leading with high-value-added DRAM, including High Bandwidth Memory (HBM). Following the earnings announcement, the company also projected in its conference call that memory semiconductor profitability could be achieved in the first quarter.

The semiconductor industry is closely watching when Samsung Electronics will start to show tangible results in its system semiconductor business. When Samsung announces its earnings, it separately discloses only the memory business revenue within semiconductor (DS division) sales, so the exact system semiconductor performance is unclear. However, the securities industry expects the entire system semiconductor performance, including design (System LSI division) and foundry (Foundry division), to turn profitable this year. Some securities firms, such as Heungkuk Securities, even predict that system semiconductor operating profit will turn positive as early as the first quarter.

However, narrowing down to the foundry business, the outlook is not immediately optimistic. Although Samsung Electronics achieved its highest-ever annual order intake in the foundry sector last year, it could not avoid poor performance. This was due to customer inventory adjustments and a frozen market caused by delayed global economic recovery. The recovery in performance is also expected to be limited in the first quarter. Jung Ki-bong, Vice President of Samsung Electronics’ Foundry Business Division, expressed cautious views, saying, "We expect demand improvement with new AI-equipped product launches in the first quarter of this year, but customers continue to reduce inventories."

What about Taiwan’s TSMC, which holds a majority share of the foundry market? TSMC recently announced its fourth-quarter results for last year and provided its first-quarter outlook, expecting net income between $18 billion and $18.8 billion. This is higher than the same period last year ($16.72 billion) but lower than the previous quarter ($19.62 billion). This is because its major customer, U.S. Apple, is entering an off-season, leading to expected reductions in related orders.

Wendell Huang, TSMC’s Chief Financial Officer (CFO), stated, "Due to seasonal factors in the smartphone market, we expect (performance) to be affected," adding, "This will be partially offset by continued demand related to High-Performance Computing (HPC)." Although internal business conditions vary among foundry companies, this comment indicates that the overall situation in the first quarter is not entirely favorable.

Nonetheless, the foundry industry remains hopeful for a recovery in market conditions this year. Although utilization rates declined last year due to reduced customer orders, they expect utilization to increase again this year. This is because fabless (semiconductor design) companies, which are customers, are expected to increase related orders as they reduce inventories compared to last year. Above all, there is great anticipation for growing demand as the AI era fully unfolds. In fact, TSMC expects the foundry market size to expand by about 20% this year compared to last year.

Samsung Electronics is also aiming for a turnaround opportunity. The company plans to enhance its technological capabilities by upgrading its 3-nanometer (nm) process, which began mass production in 2022, to the second generation. It also expects an increase in business opportunities related to on-device AI, which has recently gained attention. As various electronic devices equipped with on-device AI are released, demand for high-value-added and high-capacity semiconductors will increase, and this trend is expected to contribute to growth in foundry orders.

Samsung is also accelerating preparations for the 2-nanometer era, scheduled for 2025. During this conference call, Samsung Electronics announced that it has secured customers for the 2-nanometer process and will mass-produce AI accelerator chips using this process in the future. This is the first time Samsung Electronics has officially disclosed customers for its 2-nanometer business.

Editor's NoteSemiconductors, often called the rice of modern industry. Although we hear the term every day, it’s hard to explain when asked. Peace & Chips will make the complex concepts and overall industry trends easy to digest for you. Just put your spoon down and enjoy.